Private note-holder trying to undo subject-to deal - Posted by B.L.Renfrow

Posted by Wayne (MD) on March 05, 2001 at 06:19:11:

I’ve searched google in an attempt to come up with a synopsis of the Garn-St.Germaine Act and have not found anything. Can you point me in the right direction?



Private note-holder trying to undo subject-to deal - Posted by B.L.Renfrow

Posted by B.L.Renfrow on March 04, 2001 at 12:06:34:

This is a situation I haven’t run into before, and would appreciate some input.

Got a call several months ago from a very motivated seller…elderly lady owned a SFR 30 minutes away which she had been renting out for a few years, but due to the distance and some deadbeat tenants, she wanted out badly.

She was very willing to deed me the property subject to the existing mortgage. But when I found out it was held by a private individual, I deferred, since I didn’t want the hassle of trying to deal with this guy.

But the seller was persistent. After several increasingly-anxious calls from her, I finally agreed to look at the place and go over the paperwork. As it turned out, the place was in decent shape. The note contained the following DOS clause:

“In the event the mortgagor sells or conveys the property, or otherwise transfers it, the entire remaining balance of principal sum and interest shall, at the option of the mortgagee, immediately become due and payable.”

So I called up the note holder. I explained, albeit briefly, about subject-to, and how his note and mortgage would remain intact, and how the original mortgagor would still maintain personal liability for the note. His response: “Sounds fine to me. As long as I get paid, that’s all I care about.”

So I closed with the seller a few weeks ago. However, I did not record the deed right away, since I needed to complete some due diligence, and the property (and clerk’s office) is in another county, some distance from me. I replaced the seller’s insurance with my own policy, naming the mortgagee.

Shortly thereafter, my seller received a call from the note holder, ranting and raving about “fraud” and screaming, “You can’t do that, I will call the note due.” The guy also calls my insurance agent, with the same comments.

The seller called me, upset. I try to call the note holder, but he doesn’t return messages. So I immediately sent him a letter, explaining again the transaction which took place, and assuring him his interest was protected.

In the meantime, my first payment on the note was received by the note holder on March 1. I figured that might calm him down. It did not.

I received a letter from his attorney yesterday, asserting his client did not agree to any such transfer, it violates the DOS, bleah, bleah, bleah. The attorney says the guy will only go along if I (or “whoever is the prime beneficiary of the intervivos trust”) provide financial statements to the note holder and personally assume the mortgage and guarantee the note, which I am not willing to do.

Interestingly, my seller says she offered to simply deed the property back to the note holder before she ever contacted me, and he refused. So I am not quite sure at this point, what the guy wants, other than for me to personally guarantee this note, which isn’t going to happen…not because I have any intention to default, but that defeats the whole purpose of doing subject-to deals in a trust.

Now, the other considerations: This was a marginal deal in the first place, but it was a slow period and I took it anyway. But after marketing it using my usual methods for the past 2 weeks, and not getting a single call, it appears I may have overestimated the price I could get for it. (It’s in a very small village, so comps are not readily available nor useful.)

If it were a potentially high-profit deal, I’d be more inclined to challenge the note-holder. As it stands, I’ve already eaten holding costs on this deal, with probably more to come, so litigation or even expensive legal manuvering would make little sense. Also, I have not yet recorded the deed. However, there is an obligation to my seller, to whom I gave assurances I would take the problem off her hands. So simply backing out and telling her, “Sorry, it’s not going to work out” doesn’t seem a reasonable solution.

What would you do with this?

  1. Rush to record the deed, then tell the note holder I will deed it back to him, if he agrees to release the seller from liability?

  2. Ignore the lawyer’s letter, record the deed and just keep making the payments.

  3. Argue with the lawyer that under Garn - St. Germain, the transfer does not violate the DOS and therefore his client can go pound sand? Obviously, he has already figured out that I must hold beneficial interest. I am also co-trustee. Therefore, it seems the anonymity factor is already breached.

Of course, I realize the best option would be to get a quick sale to a cash buyer and simply pay off the note. But, given the lack of interest thus far and the local economy, this is looking more and more unlikely. I don’t have enough room on this deal to discount enough below FMV to move it immediately.

Typically, on my subject-to deals I either lease option to a tenant-buyer or sell on a land contract. My buyers can seldom qualify for immediate bank financing, and if they could, there are plenty of other houses to choose from. And naturally, even if an interested/qualified buyer or tenant-buyer should suddenly come forth, I don’t feel I could sell or L/O to them until this issue gets resolved.

I’d be interested to hear how the rest of you doing subject-to deals would handle this one.

Brian (NY)

just curious- did he cash the 3/1 payment… - Posted by Anne-ND

Posted by Anne-ND on March 05, 2001 at 09:39:15:

…and is there any reason to think that legally by accepting payment on the note AFTER he knows about the subject-to he’s on less-firm ground? Have your lawyer check out the note with a fine-toothed comb.


Set up a PACTruts-type structure. - Posted by Brian Mac

Posted by Brian Mac on March 04, 2001 at 18:33:25:


What if you went back to the seller and said: “The only way this is going to work is if you stay partially in the deal. What we can do is tear up the old deal. I haven’t recorded the deed anyway. We’ll still set it up with a trust, but instead you will retain a percentage of interest (10% minimum). You will agree to forfeit your interest at the termination of the trust only when I’ve fulfilled my obligations. Then, I will just lease the property from the trust for the payment amount. In addition, you will sign a limited power of attorney that will allow me to control your voting rights. If we don’t do something like this, I’m probably not going to be able to do this.”

In particular, if you find or create a corporate trustee to hold title, the sellers attorney will be in a bind to advise calling the loan without violating the restrictions pursuant to Garn & CFR. If the guy still tries to enforce due on sale, it’s probably not worth it. But it might be worth calling his bluff.

Brian Mac

Re: Private note-holder - Posted by Monique

Posted by Monique on March 04, 2001 at 17:10:30:


If this were me … and it just might be soon since we’re closing on a privately-held Subject To deal tomorrow … I would do one of two things:

  1. FOR A MARGINAL DEAL: Explain to the Seller that you, in good faith, explained the transaction to the Noteholder and got his permission before you did the deal. Neither she nor you could anticipate his change of heart. Since she really wants out of the property, the only way you can help would be as follows – you deed her the house back and take an exclusive option on the property. If you are able to find a cash buyer, only then will you buy the property and pay off this private individuals loan.

  2. FOR A SLAMMING DEAL: Your number #2, ignore the attorney’s letter and keep making the payments. Look for a Buyer who can get a low LTV loan (but high enough to pay off the privately held 1st mortgage) with you holding a 2nd mortgage. If the seller does call the loan while you’re looking for your Buyer, argue the Garn St. Germaine Act at that time.

My $0.02,

PS: Please keep us posted on what you decided to do.